REPORT OF THE CHAIRMAN ON CORPORATE GOVERNANCE AND INTERNAL CONTROL

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REPORT OF THE CHAIRMAN ON CORPORATE GOVERNANCE AND INTERNAL CONTROL

I. INTRODUCTION

As Orolia is listed on the Alternext market, and has been since August 2007, it is not legally obliged to prepare the Chairman’s report on corporate governance and internal control provided for in paragraph 6 of Article L. 225-37 of the French Commercial Code.

Nevertheless, given its highly decentralised structure and its strategy of external growth, it has appeared important to the Board of Directors to implement corporate governance and internal control principles that would ensure a good level of security for the Company’s shareholders. The Board has wished to keep the Group’s shareholders informed about this by means of this Report, which was approved by the Board of Directors on 30 April 2010.

II. PREPARATION AND ORGANISATION OF THE BOARD’S WORK

The Company has adopted the principles mentioned in the Corporate Governance Code for mid- and small-caps published by Middlenext in December 2009. The reason for this change from the previous report, which was based on the AFEP/MEDEF framework, is that medium-sized enterprises are confronted with corporate governance issues that are different from those of large corporations. The new Middlenext Code was designed specifically to take account of these aspects, for which the AFEP/MEDEF Code is not completely suited.

In accordance with the Middlenext Code, the Board of Directors has informed itself of the various “points for vigilance” raised in this code with respect to “executive”, “oversight” and “sovereign” powers.

A. ORGANISATION AND FUNCTIONING OF THE BOARD 1. Rules on the composition of the Board

The Board of Directors today has five members, appointed by the General Meeting in accordance with the law and the Articles of Incorporation. They are:

- Jean-Yves Courtois - Erik Van der Kaay - Henri Magnan

- BNP Paribas Private Equity, represented by Nicolas Vaillant who was co-opted by a decision of the Board of Directors on 17 December 2009 following the resignation of Alexandre Dayon. On taking up his appointment, Nicolas

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Vaillant was informed of his obligations resulting from it, and in particular those relating to the legal rules on holding several appointments, before accepting it. He also signed the Board Charter.

- Airtek Capital Group, represented by Ron Buckly.

Two non-voting directors (censeurs) – Euromezzanine and Laurent Asscher – are also authorised to attend all Board Meetings.

The censeurs are charged with ensuring strict application of the Articles of Incorporation. They attend Board Meetings and examine the half-year and annual financial statements, on a consultative basis. They can present their observations regarding these matters to the Board of Directors whenever they consider it appropriate.

Because of the Group’s rapidly changing corporate scope, resulting from its strategy of external growth, and the consequences in terms of the frequent changes in strategic and tactical issues, Directors’ appointments are renewed annually (the Articles of Incorporation set the appointment term at one year).

The main qualities expected in a Director are experience of the company, its technologies and its markets, personal commitment to the Board’s work, understanding of the business and financial world, the ability to work with others while mutually respecting different opinions, the courage to affirm what may be a minority position, a sense of responsibility towards shareholders and other stakeholders, and integrity.

The Directors hold appointments in other companies as follows:

Senior Executive Company Appointment Group company Foreign company Unlisted company Jean-Yves Courtois

SPECTRATIME Director and Chairman

T4SCIENCE Director

SPECTRACOM Director and Chairman PENDULUM INSTRUMENTS Director and Chairman

McMURDO Director and Chairman

Erik Van der Kaay

BALL Corp. Director - -

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MicroDevices

Nicolas Vaillant Global Imagine on Line

Director

Ron Buckly Tekelec Inc Director -

TraceSpan Communication Inc

Director -

2. Directors’ independence

Every year, the Board of Directors examines whether its members are independent, on the basis of a report from the Compensation and Appointments Committee.

The Board of Directors considered that Directors appointed by the General Meeting following a proposal from one shareholder or category of shareholders could not be considered independent as understood under the generally accepted corporate governance principles.

Having examined in detail its members’ situations, the Board of Directors, retaining the proposal of the Compensation and Appointments Committee, considered the following members to be independent:

- Henri Magnan - Erik Van der Kaay.

Their independence has been assessed in the light of the definition in Article 1 of the Board Charter and on the basis of the criteria laid down in the Middlenext Code.

3. The Board Charter

The Board Charter, initially introduced by a decision of the Board of Directors dated 7 June 2007 and amended by the Board of Directors on 30 April 2010, does not replace the provisions of law and the Articles of Incorporation governing the Board of Directors.

It incorporates Paris financial market corporate governance practice and complies with the recommendations of the Middlenext Code, in particular Recommendation 6. The Board Charter covers the following topics:

- Membership of the Board of Directors (composition of the Board, independence, availability, diligence, loyalty, transparency, confidentiality, non-competition, remuneration).

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- Powers and responsibilities of the Board of Directors (representation and corporate interest, specific powers and responsibilities). In this connection, the annual budget, the three-year strategic plan, acquisitions and disposals are systematically submitted for the Board’s approval.

- Information given to the Board of Directors (communication, training). - Board Committees (membership, powers and responsibilities,

organisation).

- Functioning of the Board of Directors (meetings, attendance and representation).

The Board Charter is available on the www.orolia.comwebsite, in the Investors section.

4. Determination of the remuneration and benefits of all types paid to Company Officers

The Board of Directors has drawn up the principles and rules set out below to determine the remuneration and benefits of all types paid to Company Officers.

a) Remuneration of the Chairman and Chief Executive Officer and

of the Deputy Chief Executive Officer

Since the 2009 financial year, Jean-Yves Courtois (Chairman and Chief Executive Officer) is paid a variable remuneration linked exclusively to objectives for the Group’s financial performance, which are consistent with the budget for the period. Christophe François (Deputy Chief Executive Officer) is paid a variable remuneration linked exclusively to objectives for the Group’s financial performance, which are consistent with the budget for the period.

b) Remuneration of Directors: criteria for payment of Directors’

fees

The Shareholders’ General Meeting of 30 January 2008 set the maximum aggregate amount of Directors’ fees to be allocated between the Company’s Directors at €100,000 for 2008 and the Shareholders’ General Meeting of 8 June 2009 set this amount at €60,000 for 2009. The amount effectively allocated was €32,000 in 2008 and €60,000 in 2009.

The allocation criteria are based solely on Directors’ contribution to the Board’s work, depending on their presence and the time devoted to their duties.

The Management Report includes all disclosures on Company Officers’ remuneration.

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5. Disclosures required by Article L. 225-100-3 of the French Commercial Code

The disclosures of items that could have an effect in the event of a public offering, listed in Article L. 225-100-3 of the French Commercial Code, have not been made in the Management Report, as the Article in question only applies to companies having securities traded on regulated markets.

6. Preparation of the Board of Directors’ work The Chairman

• finalises the documents prepared by the Company’s staff; • organises and directs the Board of Directors’ work;

• ensures that the Directors are in a position to perform their duties and, in particular, that they have the necessary information and documents to enable them to do so.

Provision of information to Directors

Board Papers. Meetings of the Board of Directors are convened between 6 and 10 days before the date of the meeting by means of invitations sent to the Directors. Each invitation to attend is accompanied by the Agenda and the Board Papers for the meeting (or the main items included in them if they cannot be finalised by the time of sending), and the draft Minutes of the previous meeting. If necessary, supplementary information is sent to Directors after the invitation or distributed during the meeting if urgency so dictates.

Furthermore, press releases, other than those discussed during Board Meetings, are sent to them by electronic mail as they are prepared.

Training. Training sessions about the Group’s new Units led by their managers (e.g. Sweden) have been offered to Directors. Site visits and meetings with operational teams have been made in Switzerland and Sweden.

No Director requested specific training in 2009.

Organisation and functioning of Board Committees

At 31 December 2009, three Directors and two censeurs are members of the Board Committees.

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Since 17 December 2009, the members of the Audit Committee have been Erik Van der Kaay and Charles Mercier (Euromezzanine), both appointed at the Board Meeting of 21 April 2008, and Nicolas Vaillant, appointed at the Board Meeting of 17 December 2009. The Statutory Auditors attend its meetings.

Duties. The Audit Committee’s main duties are to:

• examine the financial statements and satisfy themselves as to the pertinence and permanency of the accounting methods adopted for the preparation of the Company’s individual company and consolidated financial statements;

• verify that the internal procedures for the collection and verification of information guarantee its quality;

• ensure compliance with the rules guaranteeing the independence and objectivity of the Statutory Auditors.

This involves assessing the reliability of the arrangements contributing to the preparation of the financial statements, and the validity of the methods chosen for reporting material transactions, rather than considering the detail of those financial statements.

This Committee met twice in 2009, with a 100% attendance rate. On average, these meetings lasted more than an hour and a half.

In 2009, as well as examining the annual and half-year balance sheets and income statements, the Committee examined the Group’s financial organisation.

During the two meetings on finalising the financial statements, the Committee members were able to discuss matters with the Statutory Auditors, who had previously sent them their reports, without the Company’s Chief Administrative and Financial Officer being present.

COMPENSATION AND APPOINTMENTS COMMITTEE

Since 21 April 2008, the members of the Compensation and Appointments Committee have been Henri Magnan and Laurent Asscher.

Duties. The Compensation and Appointments Committee’s duties are to study the Company’s General Management’s recommendations and make proposals to the Board of Directors regarding:

• remuneration of members of the Group’s Executive Committee • granting of share subscription or share purchase options • granting of free shares

• the appointment of senior executives of the Group and its main subsidiaries and of members of the Board of Directors

• the functioning of the Board of Directors

• renewal of the membership of the Board of Directors

• succession plans for the unforeseeable absence of executive company officers, with the Chairman’s opinion

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• the composition of the Board Committees.

The Committee met three times in 2009, with a 100% attendance rate. Meetings lasted approximately two hours. Amongst the topics discussed by the Committee in 2009 were the remuneration of the Chairman and Chief Executive Officer and of the main senior executives, the share option and employee shareholding policy, changes in the Group’s organisation and the related appointments, renewal of the Board of Directors and membership of the Committees.

The Committee also prepared the annual review of the functioning of the Board and the independence of the Directors, at the beginning of 2010.

B. REPORT ON THE ACTIVITIES OF THE BOARD OF DIRECTORS IN 2009

1. Average notice period for Board Meetings

On average, Board Meetings were convened approximately seven days before their date in 2009. However, the provisional schedule of Board Meetings was drawn up in December 2008.

2. Representation of Directors

Directors can be represented at Board Meetings by another Director. During 2009, no Director availed himself of this facility.

3. Chairmanship of Board Meetings

Board Meetings are chaired by the Chairman, or if he is absent, by a Director designated by the Board. The Chairman chaired the seven meetings held during the financial year.

4. Videoconferencing

The Articles of Incorporation allow for Directors to take part in Board Meetings by means of videoconferencing or telecommunication systems. In application of the Articles of Incorporation and the Board Charter, Directors who take part in Board Meetings by such means are deemed to be present for the calculation of the quorum and voting majorities, except for votes on the following matters: the appointment, renewal of the appointment or the removal of the Chairman, the Chief Executive Officer or Deputy Chief Executive Officers, the setting of their remuneration, finalisation of the individual company and consolidated financial statements and of the annual report. This facility has been used three times during the financial year by those Directors who are geographically the furthest away (west coast of the USA).

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5. Persons invited to attend Board Meetings

During the financial year, the Group’s Chief Financial Officer was heard by the Board of Directors on the occasion of discussions about Orolia’s individual company and consolidated financial statements.

The Statutory Auditors were invited to attend Board Meetings at which the half-year and annual financial statements were considered.

6. Number of meetings, their length and attendance rate

The Board of Directors met seven times in 2009 at dates set at the end of the previous year.

Dates and attendance rate of Board Meetings in 2009:

23/2/2009 100% 16/4/2009 100% 8/6/2009 60% 23/6/2009 100% 24/7/2009 100% 20/10/2009 80% 17/12/2009 100%

7. Main topics considered

Apart from the matters regularly considered by the Board of Directors, (i.e. the annual budget and updates, finalisation of half-year and annual financial statements, appointment and remuneration of the Chairman and Chief Executive Officer, convening of the Shareholders’ General Meeting, strategy review and examination of the main projects in progress, approval of regulated agreements, etc), reports from the relevant specialised committee were included in the agenda of meetings in 2009 on the following:

- renewal of the Board of Directors and appointment of a new Director - the appointment of a new member of the Audit Committee

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- the implementation of a free share plan in favour of Jean-Yves Courtois and Christophe François (Chairman and Chief Executive Officer, and Deputy Chief Executive Officer respectively)

- the approval of the proposal to change the Alternext trading category - examination of acquisition projects

- examination of the Group restructuring and reorganisation plan

- formal recognition of the share capital increases that had enabled the acquisition of Kannad and McMurdo to be financed

- approval of a bank loan to finance the acquisition of McMurdo and of a lease-back transaction on Kannad’s building at Guidel

- preparation of the 2010 budget.

C. ASSESSMENT OF THE BOARD’S FUNCTIONING

At its meeting of 22 February 2010, the Board of Directors examined what could be done or improved to enable the Directors to perform their duties fully and what they would need to improve their performance as Directors, for example:

- frequency, quality and effectiveness of Board Meetings - understanding of the Company’s business and products - availability and transparency of useful information - ability to raise issues and obtain replies

- pertinence and effectiveness of delegation of authority to Orolia’s Chairman and Chief Executive Officer.

The Board of Directors expressed the wish that one specific Board Meeting a year be devoted to a review of the Group’s strategy.

The Directors made no particular observations, other than as stated above, regarding the manner in which the Board of Directors has functioned until now and expressed their great satisfaction.

D. RESTRICTIONS PLACED ON THE CHIEF EXECUTIVE OFFICER’S POWERS

In accordance with the provisions of the New Economic Regulation Act, the possibility of separating the functions of Chairman of the Board of Directors from

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those of the Chief Executive Officer was incorporated into the Company’s Articles of Incorporation at the time of its formation in October 2006.

The Board of Directors of Orolia considered on 2 October 2006 that there was no need at that stage of the Company’s development to separate powers in this way. Jean-Yves Courtois’ appointment as Chairman and Chief Executive Officer was renewed for the period of his appointment as Director by the Board of Directors on 8 June 2009.

As an internal rule that cannot be used against third parties, in his position as Chief Executive Officer Jean-Yves Courtois must obtain prior authorisation from the Board of Directors for all decisions relating to:

- the signature of agreements on the disposal, acquisition or formation of subsidiaries, commercial goodwill and companies’ assets

- the signature of contracts involving non-hedged risks of more than €1m - the granting of guarantees or pledges of more than €150k to third parties - investments of more than €150k

- the mandatory annual approval of the budget - redundancy of more than 10 employees

- the hiring or dismissal of his closest direct staff - the remuneration of the main executives

- major organisational changes

- material changes in the structure of the Group’s financing.

E. PARTICIPATION BY SHAREHOLDERS IN DECISION-MAKING

Articles 25 to 34 of the Articles of Incorporation set out how shareholders can take part in General Meetings.

F. DIFFERENCES COMPARED WITH THE MIDDLENEXT PRINCIPLES

There are no material differences between Orolia’s corporate governance arrangements and the Middlenext Code.

III. INTERNAL CONTROL PROCEDURES IMPLEMENTED BY THE COMPANY A. DEFINITION AND SCOPE OF INTERNAL CONTROL AT OROLIA Orolia has referred to the AMF’s internal control system reference framework adapted to small and medium capitalisations, published in a recommendation on 22 January 2007.

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This document defines internal control as a company’s system, defined and implemented under its responsibility, that aims to ensure that:

laws and regulations are complied with;

the instructions and directional guidelines fixed by Executive Management or the Management Board are applied;

the company’s internal processes are functioning correctly, particularly those implicating the security of its assets;

financial information is reliable;

and generally, contributes to the control over its activities, to the efficiency of its operations and to the efficient utilisation of its resources.

The Group’s internal control rules apply to all the companies controlled by Orolia or over which it has operational control.

B. GENERAL INTERNAL CONTROL ENVIRONMENT OF THE OROLIA GROUP

1. Context

Orolia was formed in October 2006 and developed a strategy of external growth. In a very internationalised market, acquisitions are mostly made outside France. Furthermore, from the outset, the Group has wanted to operate on a federal model, drawing on the skills and knowledge of local managers who generally form a key part of the decision to acquire a shareholding.

It therefore appeared very quickly that an effective internal control system was an indispensable part of such an international and decentralised organisation.

The Board of Directors has therefore made the Deputy Chief Executive Officer responsible for ensuring that rules and procedures are put in place that guarantee the necessary degree of internal control in the processes identified as important by the Company.

2. General organisation of internal control

Members of the General Management are primarily answerable for the internal control arrangements. The Group’s Deputy Chief Executive Officer defines, with the Chairman, the internal control strategy and insures that the necessary means are deployed. This responsibility is directly delegated to the general management staff of the Group’s Units, who must ensure that this strategy is deployed in their area of responsibility.

The Audit Committee of the Board of Directors agrees the General Management’s internal control strategy and regularly satisfies itself, with the Group Finance Department, as to the means deployed and actions taken.

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The Finance Department and the Group Performance Manager assist all operational or functional managers in identifying the risks incurred by their activities and in deploying the means to manage or reduce those risks. They then ensure that adequate resources for internal control are maintained in Units and monitor progress of corrective action, in particular with the assistance of Divisional and Unit Finance Officers within the Finance CET (common efficiency team) and operational managers within the Operations CET.

3. Resources currently deployed

Today the internal control system is based on the following:

• Corporate governance arrangements that provide for a significant number of independent directors, guaranteeing the Board’s operational role.

• Two specialised Committees that consider more particularly the following areas:

o Financial information o Remunerations

o The functioning of the Board of Directors

• A clear Group organisation, in particular regarding the allocation of responsibilities between central management and operational bodies.

• A precise description of the Group’s financial management organisation (roles and responsibilities).

• A matrix of the Group’s risks, which lists and analyses the main identifiable risks having regard to the Group’s objectives.

• The Group’s set of accounting policies. • The Group’s set of financial control methods.

• The Group’s set of cash management policies and procedures.

• A set of internal audit procedures intended to assist Units in testing their financial system.

• Audits by Statutory Auditors.

• ISO 9001 certification for each Group entity.

• Audits conducted in connection with ISO 9001 certifications or by customers such as the European Space Agency.

4. Internal audit

The Group’s size does not allow it to have a dedicated internal audit organisation. The Statutory Auditors have therefore been asked to make recommendations on the improvement of internal control relating to financial issues in a specific report. Finance Directors must then implement corrective action plans.

Moreover, an internal audit questionnaire enabling Units to test their financial organisation has been drawn up, based on the AMF’s Application Guide for Internal Control Procedures related to the Accounting and Financial Information published by Issuers. This questionnaire is intended to guide Units when analysing accounting and financial risks and to help them identify these risks and implement measures aimed at reducing them.

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A first audit was carried out in May 2008 by each Unit except for Pendulum Instruments, which had just joined the Group; its audit was made in July 2009. Two follow-up audits were also carried out in the USA and Switzerland in 2009.

Moreover, in December 2009 the position of Group Performance Manager was created with a view to strengthening the Group’s ability to identify and exploit sources of operational performance improvements for Units and central departments.

C. INTERNAL CONTROL OF GROUP COMPANIES

1. Operational internal control

Given the size of Units, their General Managers work very closely with operational staff. They apply the internal control rules locally, in liaison with the Unit’s Finance Director. The main corporate processes – such as purchases, IT, quality control, etc. – are taken into account in depth at Unit level.

Moreover, all the Group’s subsidiaries are ISO 9001 certified. This means that there are ISO procedures embedded in all the subsidiaries’ industrial processes and that staff are used to knowing and complying with internal procedures.

Given the Group’s areas of business, most of its subsidiaries have to work in an environment of permanent control exercised by their main customers or principals (i.e. Defence ministries, the European Space Agency, etc), which require ever more demanding certification procedures and controls.

The Group Performance Manager also carries out control, monitoring and advice duties and assists Units regarding the performance of their operational processes. Lastly, Units are supported locally with regard to national legislation by external advisers, such as lawyers, to manage their risk exposure in various areas and in particular: - Tax - Company law - Employment law - Environmental issues. 2. Central control

Some transactions that are complex or involve risk exposure cannot be carried out Units acting alone and must be carried out or supervised by Group General Management, which sets up an appropriate internal control arrangement to manage the related risks.

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a) Investments and Disinvestments

No Group entity may decide alone to purchase another company, whether fully or partially, or to dispose of a shareholding. Units must submit such transactions to the Group’s Chairman and Chief Executive Officer. Projects are generally examined by the Strategy CET (common efficiency team), which brings together the senior executives of the Group’s main Units, and then by the Board of Directors.

b) Short-term cash

The Group has drawn up recommendations on short-term cash management, which prohibit taking speculative positions, and these have been approved by the Board of Directors. The investment vehicles in each country are endorsed by the Group Finance Director.

c) Long- and medium-term cash

The Group Finance Department manages the Group’s medium- and long-term financing needs. No financing transactions are authorised locally without this department’s approval.

d) Export finance

Export finance transactions (i.e. guarantees, buyer’s credit, documentary credit or more complex transactions) are prepared in liaison with the Group Finance Department.

e) Hedging of currency risks

Units must hedge their currency risks on purchases and on sales as far as possible. They must carry out hedging transactions solely within the framework of the Group’s guidelines and using the vehicles authorised by the Group.

f) Property

All property transactions are discussed with the Group’s General Management.

g) Compliance with company law

The Group’s General Management maintains a central file, which records all fundamental legal and financial information on all Group companies. In particular, changes in net equity, directorships, and application of shareholder agreements in the case of Joint Ventures are monitored.

h) Insurance

The Group defines an insurance cover policy that must be followed by all Group Units.

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i) Disputes

The Group’s General Management is informed of all material disputes, which enables it to take all measures it considers necessary.

3. Risk-management procedures: risk matrix

In June 2008, the Finance CET, which brings together all the Group’s Finance Directors, drew up a Group risk matrix covering the major processes. Since then, a Group-level review has been made for each of the 2008 and 2009 accounts closings. A risk management and control system has been drawn up and a risk reduction plan has been prepared as explained below:

• 8 macro-processes have been identified: o 1. Mergers and acquisitions o 2. Design and development o 3. Marketing and sales o 4. Production and delivery o 5. Maintenance and warranty o 6. Finance and communication o 7. Management and control o 8. Protection and defence.

• 72 risks have been listed and analysed in the light of the Group’s objectives. A potential impact and probability of occurrence have been attributed to each risk.

A system to monitor each risk has been designed and a risk reduction plan has been identified whenever possible.

This analysis has enabled those processes that have a major impact on the Group’s overall objectives to be identified.

The following processes are therefore considered particularly important and are more specifically monitored at Group General Management level:

• acquisition and integration of new business units

• financing and / or raising funds and monitoring financial commitments to lenders

• limitation of the effects of the global economic crisis

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D. CONTROL OF FINANCIAL INFORMATION

1. Internal control of accounting and financial information The internal control of accounting and financial information is built around:

• the Audit Committee of the Board of Directors

• the Group’s management and financial accounting organisation

• the management and financial accounting reporting system and the Group

Management Committee

• the Group’s set of accounting procedures and methods • the Group’s set of financial control methods

• the Group’s set of cash management policies and procedures

• a set of internal audit tools intended to assist entities in testing their financial system.

2. The Audit Committee

The role of the Audit Committee is described in section II.A.6 above.

3. Management accounting and financial accounting functions Duties

The Group Chief Financial Officer designs and implements the Group’s accounting and management methods, procedures and rules.

Under the authority of the Group Chief Financial Officer, each Unit’s finance department incorporates the management accounting and financial accounting functions, which perform the essential duties to ensure consistency of Group financial data. These departments produce the individual company financial statements and convert them to the Group consolidation formats, complying with deadlines and legal obligations.

The management accounting function steers the budgets and forecasts process and produces monthly and quarterly management accounting reports promptly, ensuring data consolidation and consistency. The quarterly report is presented and discussed during the Group Management Committee meeting in the presence of the Group’s Chairman and its Chief Financial Officer, and a summary is sent to the Board of Directors, who discuss it.

Units’ accounts departments ensure the consistency of accounting systems in each country and prepare the individual annual financial statements and data needed for consolidation, complying with the Group accounting standards as distributed.

Each Unit identifies and carries out the necessary changes to its accounting and management information systems.

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Organisation

Coordination of the Group finance function is carried out through an interdisciplinary team called the Finance Common Efficiency Team. This working group meets once or twice a month by telephone to organise accounting work and discuss the procedures to set up and the financial communication and reporting dates.

The Group has several procedure manuals that are mandatory in all Group Units. Unit Finance Directors ensure compliance with these procedures.

Accounting procedures manual

This manual describes in detail the accounting rules and policies applicable to preparing consolidated financial statements and in particular include a strict coding system to record profit or loss on contracts. It is distributed to the Units and to the external auditors.

Orolia has defined a reporting standard for the half-year and annual financial statements which makes full homogeneity of form mandatory for each Unit, guaranteeing consistency of the accounting data input. Control is semi-automatic and the transfer of bookkeeping entries to the Group finance department is authorised only after validation by the local Statutory Auditors, who have received a copy of the Group’s accounting procedures.

All accounting and financial staff within the Group level know and understand this tool.

Financial control procedures manual

The key financial control procedures are described in this manual, including budgets, reporting procedures, management of long-term contracts, investments, signature of commercial proposals, etc.

Cash-management and financing manual

As stated in paragraph 3, there is a manual covering cash-management, hedging foreign currency exchange rate risk exposure and export financing. Subsidiaries’ staff know and understand this manual.

4. Unified management and financial accounting reporting system

All Group Units apply the Group financial management cycle which comprises three fundamental components:

• the strategy and budgeting process • monthly and quarterly reporting

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The budgeting process

The budgeting process applies to all Orolia subsidiaries. Its main steps are:

• during the summer, the Strategic Plan for each activity is updated and

validated by the Strategy CET;

• in November, each entity prepares a three-year business plan and a forecast

outturn for the end of the current year;

• the budget corresponding to the first year of the business plan is converted to

a quarterly basis to use for comparison in Group reporting.

Quarterly reporting and the Management Committee

The quarterly report is a major component of the financial control and information arrangements. It is the most important tool for detailed monitoring, control and management by Group General Management. It comprises several documents that are prepared by operational Units’ Finance Departments and presented by Units’ Management to the Group Management Committee quarterly.

The monthly report comprises numerical data, comments on changes and variances against budget and performance indicators, in a uniform mandatory format.

A summary is sent to the Group’s Directors.

Reconciliation of accounting information with forecasts, together with the monthly analysis at each level of the Group’s organisation, contributes to the quality and reliability of the information produced.

Application of the principle of using identical figures in management accounting and financial accounting systems results in the Group entities’ management accountants using the same IT systems to produce reports on actual performance.

Consolidation and internal control

As part of the consolidation process, entities are audited locally. The local Statutory Auditors carry out a review of each Unit’s procedures and internal control, and validate the consolidation package submitted by each Unit. The consolidated financial statements are audited by the Group’s Statutory Auditors. A timetable and medium for reporting intra-Group transactions have been laid down.

Given Orolia’s size, there is no specific internal audit department. The Statutory Auditors have a permanent engagement, which is independent from the verification of the individual and consolidated annual financial statements, to control compliance of accounting with the rules in force and to verify the consistency with the annual financial statements and the fair presentation of the information given in the Board of Directors’ Management Report and in the documents sent to the shareholders on the Company’s financial situation and the financial statements.

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Statutory Auditors

In accordance with the legislation applicable to it, the Company has two Statutory Auditors, of which one is Deloitte. The French or foreign operational subsidiaries appoint Statutory Auditors in accordance with the applicable regulations; in most cases they are members of the Deloitte network in order to facilitate audit consistency and homogeneous control methods. The Company also calls on the services of the Statutory Auditors, insofar as allowed by regulations, for occasional engagements requiring their skills.

The Company or its subsidiaries can also make use of specialised external advisors from time to time.

E. AREAS FOR IMPROVEMENT

Orolia’s internal control environment and resources must continue to be improved and strengthened. The main areas for progress in 2009 were:

• deployment of a new ERP system in France;

• modification of the organisation of the Finance function in Sweden and the UK, by centralising these functions within Orolia France and commencement of deployment of the same ERP system as in France and the USA.

For 2010, the objectives will be to:

• adapt the overall organisation of the finance function to the Group’s new organisation based on three divisions;

• finalise the deployment of an ERP system in Sweden, using the same tool as in France and the USA;

• deploy a new consolidation and reporting tool, in particular to shorten the time taken for consolidation and reporting.

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